Private participation in municipal water sector

Marginal Revolution has an interesting post in response to this article which discusses the effectiveness of municipal water privatization in the US. The article writes,

Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control.

Tyler Cowen argues that water privatization may fail in well developed markets as the private contractors acquire skills to manipulate the political and regulatory process. Similarly, the absence of adequate purchasing power and the difficulty in collecting bills, makes privatization difficult to implement in very poor countries. However, he claims significant cost and quality benefits from water privatization in middle income countries, in terms of ease of mobilization of capital, expansion of water coverage, increase in quality of supply, and reduction in unaccounted for water.

I will disagree with Tyler on this. My argument is that instead of wholesale, end-to-end privatization, a more nuanced approach of privatizing specific services in the sector, depending on the specific local conditions, may be a more effective approach to encouraging private participation in the sector. Political considerations arising from the need to maintain distributional fairness in pricing and allocation is a major imepdiment to any privatization efforts. Further, the inherent difficulty of establishing baseline standards and monitoring quality of outcomes defined in a contract too makes private contracting difficult to manage successfully.

Services like billing, database management, and contracting employees are the simplest to outsource. Likewise, maintenance of upstream assets like treatment facilities too are amenable to private participation. Efficiency improvement services like supervisory control and data acquisition (SCADA) can be both installed and maintained by private agencies. However, maintenance of distribution network is difficult to regulate and monitor. At best, the maintenance of 24 hours supply distribution networks in certain distinct metering areas, where distributional concerns are not an issue, can be outsourced.

For more on these, see this, this, this, and this.